August 10, 2023

Why do companies buy carbon credits?

Learn why companies buy carbon credits and what they're looking for when they do.
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45% of the world's largest companies have made net zero pledges. To achieve this, the vast majority need to use carbon credits to offset their emissions. This article discusses why and how companies buy carbon credits focusing on the voluntary carbon market.

Carbon credits and net zero pledges

The compliance carbon market and the voluntary carbon market (VCM) are the two spheres where carbon credits are traded.

In compliance markets, companies are legally obliged by government regulations to offset their carbon emissions.

However, the voluntary carbon market operates differently. As the name suggests, companies are not legally bound to participate. Instead, they do so out of a commitment to achieve net-zero carbon emissions, generally by 2030, 2040, or 2050. This pledge is made publicly to shareholders, customers, and the general public.

The decision to go net-zero isn't just a philanthropic gesture. Companies are acutely aware that maintaining credibility, positive public relations, and keeping pace with the transition to a sustainable future are essential for long-term survival. The commitment to net-zero emissions is a response to growing societal pressure, customer expectations, and a strategic move to be early adopters in the shift towards a net-zero economy.

Net-zero can be achieved by reducing all emissions to zero or offseting/capturing carbon themselves. However, most businesses must invest in other ways to reduce emissions while maintaining their operational activities. This is where carbon credits play a pivotal role.

How do companies decide what carbon credits to buy?

In the VCM, projects remove or offset specific amounts of carbon (measured in tonnes), which are then issued as tradable carbon credits by registries like Verra and Gold Standard. These credits serve as financial assets that can be traded and purchased by companies looking to offset their emissions.

Companies buy these credits and 'retire' them, effectively removing the corresponding tonne of carbon from circulation. This allows them to demonstrate that they have met their net-zero pledge.

The decision to buy carbon credits also hinges on several factors. Companies scrutinise the quality of the credit, ensuring that the project issuing the credit has genuinely captured or offset the carbon it claims to have. They evaluate whether 'one tonne equals one tonne', thereby verifying the integrity of the credit. Organisations like BeZero and Sylvera have developed rating systems for assessing the quality of a carbon credit.

Companies also look at the broader impact of the projects issuing the credits. They assess how many of the UN Sustainable Development Goals the project has contributed towards, thereby ensuring their investment not only mitigates carbon emissions but also promotes wider social and environmental benefits, and has no unintended negative consequences.

Finally, practical considerations come into play including the ability to buy a sufficient number of credits and the logistics of the purchasing process.

The verdict

In conclusion, the purchase of carbon credits by companies is a decision driven by credit quality, price and availability, as well as the desire to support projects that align with their mission and customer expectations.

As we navigate towards a sustainable future where ever more companies pledge to go net zero the role of carbon credits as a tool for companies to achieve their commitments is likely to grow, with demand for high quality credits growing alongside it.

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